In China, Apple’s second largest market, iPhone sales fell 18.2% in the December ending quarter, according to Bloomberg. Apple’s stock price dropped 4.4% on the news and this week two analysts downgraded their ratings on the stock, according to TipRanks.
This setback is nothing new. Apple suffered an 11% drop in China iPhone sales in the final quarter of 2023, according to the Wall Street Journal, and the company followed up the sales decline by cutting iPhone prices by up to $70, the Journal noted.
Price cuts are not fixing what ails Apple’s China strategy. Why? In a nutshell, Apple’s iPhone strategy is fundamentally the same everywhere — set prices above all rivals on the premise that customers are so locked in to their iPhones that they can’t afford to switch to lower-priced rivals.
In countries like China, that strategy only appeals to a small percentage of the market. The majority of its smartphone buyers there are happy to buy from a local manufacturer that offers a much lower-priced product with features tailored to local needs, according to a Babson College case I co-authored, Apple In China and India.
I doubt Apple will change this strategy. Therefore, investors could benefit from taking their inspiration from Warren Buffett — who as of November had sold 605 million of Berkshire Hathaway’s Apple shares — and unloading their holdings in the iPhone maker.
I have contacted Apple for comment and will update this post if I receive a response.
Why iPhone Sales In China Are Falling
Apple’s 18.2% drop in China iPhone sales for the holiday period drove a 5% global slump for the company’s smartphones in the quarter, Bloomberg reported.
Apple slipped to third place — with about a sixth of the market, according to Counterpoint research featured by Bloomberg. The leader in China’s smartphone market during the most recent quarter was Huawei.
Apple’s latest iPhone model was distinguished by its artificial intelligence features and started off strong. However, Chinese consumers could not access the AI features as Apple continues to seek “a local partner to provide on-device and cloud AI infrastructure,” Bloomberg reported.
Meanwhile, Huawei’s sales increased 15.5% in the quarter. “This is the first time since the U.S. ban that Huawei regained the leading position,” Counterpoint analyst Mengmeng Zhang told Bloomberg.
Huawei’s latest Mate 70 model gives consumers the option of using software “completely free of U.S. technology,” added Zhang — a feature that helps Huawei’s push to win a larger share of China’s premium segment.
Where Apple’s Stock Is Going
To be fair, 29 Wall Street analysts offering 12-month price targets for Apple see 11% upside in the stock — given their average target of $244.36 per share, noted TipRanks.
This week two analysts cut their ratings on Apple stock. Jefferies downgraded Apple from Hold to Underperform to “reflect ‘weak’ iPhone sales and the general consumer electronics market,” TipRanks noted.
Jefferies sees particular weakness for Apple in China. The firm highlighted a “consumption downgrade trend, as iPhone’s selling prices are still meaningfully higher than those of Chinese flagship Android models,” wrote Jefferies analyst Edison Lee, according to MarketWatch.
Jefferies is not sanguine about Chinese consumers’ willingness to pay for Apple Intelligence. “U.S. consumers do not yet find smartphone AI useful,” according to third-party survey results Lee reviewed. Therefore, Lee doubts consumers will be willing to pay extra for a wafer-level multichip module Apple is offering, “that can help enable better on-device AI,” noted MarketWatch.
Meanwhile, Loop Capital downgraded Apple from Buy to Hold after the firm’s supply chain checks suggested a “material” drop in iPhone demand in the March-ending quarter which Loop expects to “materially amplify” in the June and September quarters, added TipRanks.
Loop Capital is also skeptical consumers value Apple Intelligence — arguing generative AI features have not boosted iPhone 16 sales. “Frankly speaking, the Apple Intelligence rollout has been dismal, according to all accounts,” Loop Capital analyst Ananda Baruah told Investor’s Business Daily.
“The new Siri promised is rife with issues and user experience has been extremely disappointing. The AI features to aid in writing have been received equally as poorly,” he added.
After 18 years, Apple desperately needs a new product to take over from the declining iPhone. I do not see such a product on the horizon, so investors might want to look elsewhere for a stock to buy.
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